Problem 6.62 & 6.63 – Interest Rate with Loan Points

Fundamentals of Corporate Finance

Ross, Westerfield, and Jordan

13th Edition

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Difficulty – Hard

Determine the effective interest rate on a one-year loan of a specific amount, where the quoted interest rate includes a percentage plus a certain number of points. A point on a loan is 1 percent of the loan amount. Consider that the borrower pays the points up front and repays the loan with the quoted percentage interest. Calculate the actual interest rate being paid in this scenario.

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